Precious Metals Weekly – Downside risk is increasing

by: Georgette Boele

  • Gold prices barely profit from dollar weakness, but fall back when the dollar recovers
  • Other precious metal prices show a similar pattern…
  • …and this signals that price weakness has further to run
  • We remain negative on precious metal prices

 

Gold prices barely profit from dollar weakness…

This week, there have been rather surprising market movements in gold prices. At the start of the week, gold prices moved to above USD 1,200 per ounce because of hopes that the Fed would be more dovish than expected. The weaker-than-expected first quarter US GDP print also gave support to gold prices on Tuesday. However, the move ran out of steam around USD 1,210 per ounce. Meanwhile, the US dollar fell under heavy pressure, especially versus the euro. So gold prices barely profited from the considerable dollar sell-off. This is rather remarkable, because in general gold prices rally when the US dollar falls. Why did gold prices not rally further? In short, safe haven assets were out of favour. This was reflected in bond prices falling aggressively and both the yen and gold barely profiting from weakness in the US dollar. In general, the rise in US Treasury yields is negative for gold prices. But the effect was neutralised by the weaker US dollar, which is in general positive for gold prices.

…but fall back when US dollar recovers

The Fed statement was not as dovish as some investors had hoped. As a result, the dollar recovered slightly after the release of the statement and gold prices edged lower. However, when US jobless claims came in much stronger and the employment cost index a touch higher, the dollar recovered across the board and 10y US Treasury yields rose. As a result, gold prices quickly fell to USD 1,180 per ounce. The higher-than-expected Chicago PMI also weighed on gold prices.

 

How did the other precious metals fare?

Silver, platinum and palladium prices reacted in a similar manner to gold prices. Prices only modestly profited from weakness in the US dollar. However, they fell sharply, especially silver prices, when better US data pushed the dollar higher.

 

More weakness ahead

It seems like precious metal prices are showing greater sensitivity to positive US data surprises and a higher US dollar than vice versa. Indeed, as the above-mentioned shows, they barely profited from a weak dollar, but fell sharply on better US data and a dollar recovery. This signals that the risk is mainly on the downside in precious metal prices. Our conclusion is that price weakness has further to run. Therefore, we remain negative on the outlook for precious metal prices.